Bitcoin, Ether and other cryptocurrencies in the ecosystem have started the week bullish, pushing the market capitalization over $900 billion, up 4%, after falling below this price point late last week, as a massive selloff ensued after the Ethereum Merge was concluded. This comes as the United States’ Federal Reserve is potentially set to increase the interest rate in its upcoming Federal Open Market Committee (FOMC) meeting.
So far, since the U.S. Fed began increasing the interest rate, the market has always reacted bearishly to the news as it indicates the end of an era for cheaper access to finance because an increase in interest rate means the cost of borrowing money becomes more expensive. The market reacts bearishly because investors are shoring up their capital in a bid to save for the rainy days ahead.
Flagship cryptocurrency asset, Bitcoin, has seen its price fluctuate widely throughout the last three days, as the largest cryptocurrency by market cap at one point fell below $19,000, its lowest since the beginning of the month of September 2022.
- The FOMC meeting, scheduled to take place on Wednesday, is the highlight of all the economic calendar events scheduled for this week. This is the meeting where the U.S. Fed will hand down its decision as to whether or not to increase the interest rate and by what percentage. It is expected, according to a Bloomberg Survey, that the U.S. Feds will increase the interest rate by 75 basis points for a third consecutive meeting when policymakers announce their decision.
- If the forecast becomes true, it would lift the target range for the policy benchmark from 3% to 3.25%. Fed forecasts released at the meeting are also expected to show the upper bound of the range at 4% by year-end and edging higher next year, before cuts in 2024 take it back to 3.6%. This is also according to a survey done by Bloomberg. Such a shift represents a big step up from Fed forecasts in June, reflecting a tougher fight against inflation after August core consumer-price growth came in hotter than expected.
- Another survey by CoinDesk reveals that the markets are ascribing an 80% chance that the Fed funds rate will increase by 75 basis points and a 20% chance that it will increase by 100 basis points, or 1%. The U.S. Fed has not increased interest rate by 1% in over 40 years. Between 1978 and 1981, the Federal Reserve raised rates by 1% seven times during the term of then-Chairman Paul Volcker because of soaring inflation.
- Although Bitcoin saw a sharp drop of 3.47% take place in yesterday’s trading session, however, prices reversed course as U.S. markets opened. The decline occurred at six times the average trading volume and implies an overreaction to the downside that was subsequently corrected. There was little in the way of economic data reports that could account for the decline.
- Knowing that the market is usually bearish during times of interest rate hikes and coupled with the fact that the market has started the week bullish, traders are having difficulty pinpointing a price direction for BTC and ETH because although both assets appear tied to macroeconomic data and overall appetite for risk, the reverse is what is happening today. One factor lately for the BTC and ETH prices is the strength, or lack thereof, against the U.S. dollar, as the dollar index (DXY) has a strong inverse relationship to bitcoin’s price. BTC’s price is down approximately 58% year to date but the DXY has risen 15% over the same period.
- Looking at technical indicators, the M2 money supply, a measure of money supply within the U.S. economy, has declined 5% since January, in line with the Federal Reserve’s stance on reducing inflation. This means market participants are likely eyeing data that affects the strength of the U.S. dollar as a signal for digital assets’ price direction. Ultimately, what strengthens the dollar weakens digital assets, and vice versa. Decreasing money supply and the anticipated increase in the Fed funds rate are actions that do just that.
- New reports indicate that larger institutions have recently reduced their BTC holdings. The Commitment of Traders report, published by the Commodity Futures Trading Commission (CFTC) each Tuesday illustrates positions held by traders in futures markets. The COT report offers an inside look at where institutional investors are allocating capital.
- According to the report, long positions of larger speculators, denoted in green, dropped sharply on September 13, coinciding with the 10% decline that occurred on that day. Oftentimes, though not always, larger speculators have tended to add to long positions near market bottoms and enter short positions near market tops.
In other crypto assets, Ether, the leading smart contract platform, now operating on a Proof of Stake (PoS) consensus mechanism, saw its prices 1.72% higher, ending a slide that began after last week’s successful Ethereum Merge. A look at Ether’s hourly chart indicates a similar pattern to BTC in that it also fell on higher volume during the day, only to reverse course later. Ether has fallen approximately 17% since the Merge, suggesting a “buy the rumour, sell the news,” trade set-up.
Looking at price action compared to COT data for bitcoin indicates that it has not proven as simple for BTC as it has with other commodities. Still, absent an uptick in long positions by larger speculators, BTC prices are likely to trade within a tight range in the near term.
